Graduating into never-ending debt

Gary Lapon reports that the student loan debt crisis has reached a new stage.

March 19, 2012

Occupy San Francisco marches against the corporatization of education and growing student debt (Eric Wagner)

OVERWHELMING STUDENT debt has become a source of worry and financial distress for many millions of people--and even worse for the one in five people with student loan debt who are classified as delinquent.

And the problem will only get worse as a new generation of students and recent graduates, carrying a bigger loan burden than ever before, struggles to find work in an economy that, despite statistics showing job growth, still seems like the Great Recession, especially for young workers.

The scale of the student crisis has even caused mainstream financial commentators to suggest that a supposed "student loan bubble" will cause as much trouble as the "mortgage bubble" did a few years ago. But the real pain won't be suffered by bankers and rich investors, but by ordinary working people dealing with the effects of a higher education system where the burden of the costs of education has fallen increasingly onto students and their families.

Early this month, the Federal Reserve Bank of New York released a report titled "Grading Student Loans," which analyzed the student debt crisis in the U.S.

The report revealed that student loan debt stands at a whopping $870 billion, with 27 percent of borrowers who are in repayment past due and 21 percent classified as delinquent. Total debt on student loans easily surpassed total debt on credit cards ($693 billion) and total debt on auto loans ($730 billion), according to the study.

Some 37 million people in the U.S. carry student debt, with an average of $23,500 per borrower. However, the median amount owed--which means half of all borrowers owe more than this amount and half less--is $12,800.

The median is so much lower than the average because a relatively small number of borrowers carry extreme amounts of debt, skewing the average. According to the New York Fed's report: "About one-quarter of borrowers owe more than $28,000; about 10 percent of borrowers owe more than $54,000. The proportion of borrowers who owe more than $100,000 is 3.1 percent, and 0.45 percent of borrowers, or 167,000 people, owe more than $200,000."

In other words, about a million people have student loan debts for an amount equivalent to the cost of a house in many parts of the country.

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AND THE crisis is worse than even these numbers suggest. The figure of 27 percent who have missed payments likely understates the severity of the crisis, given that nearly half (47 percent) of borrowers have student loans that are deferred or in forbearance--which means that they don't yet have to make payments on their debt.

These are disproportionately young, current students or recent graduates, a group facing record levels of debt--the class of 2011 was the most indebted on record--and high rates of unemployment.

According to the Bureau of Labor Statistics, in the middle of last summer, less than half of the aged 16-24 had paying jobs--the 48.8 percent figure was the lowest level of youth employment since statistics started being kept in 1948. And nearly half of youth who do have jobs are employed in the "hospitality" (including food service) and retail industries--generally low-paying jobs with few benefits or little job security.

As in the broader employment statistics, Black youth--who also carry higher average student loan debt and are less likely to graduate--suffered a worse situation, with the official (and highly understated) unemployment at 31 percent last summer, nearly twice the overall official youth jobless rate of 18.1 percent.

Given this situation, it's a sure thing that when payments on the loans of current students and recent graduates begin to come due, rates of past due and delinquent borrowers will shoot up. Hedge fund investors who profit by betting on student loans expect default rates for current graduates to be as high as 40 percent, according to the Wall Street Journal.

The student debt crisis is a result of decades of tuition hikes, which have outpaced the rate of inflation by four times, alongside cuts to grant-based financial aid and funding for public higher education. Degree programs that students could pay for with a part-time minimum wage job two generations ago now require students to go into massive debt.

But unlike credit card or mortgage debt, it is nearly impossible to get out from under most student loan debt without paying it off.

In the case of federally guaranteed loans, which make up the bulk of student loans, lenders can even garnish borrowers' Social Security checks, and loans can balloon to multiple times the original amount if borrowers fall behind on payments and accrue penalties.

Sara from New York City, an adjunct professor who barely earns enough to make ends meet, has $200 taken from her paycheck by a collection agency who bought her loan from Sallie Mae. As Sara put it:

I often feel like my entire life is spent trying to figure out ways to make money rather than focusing on finishing my degree...a single medical expense wiped out the small amount of money that I usually have saved...Going to a great university, getting into one of the best programs in my field at the time--all of this seems to be worthless, because I still spend all of my time worrying about getting by.

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STUDENT LOAN debt is a crisis in the sense that it represents a human disaster for a generation of students that entered the labor market at a time when unemployment was at the highest rate it's been in decades. These graduates, labeled a "lost generation" by many commentators, face a future of working low-paying jobs they are overqualified for in order to pay back loans for degrees that mean little at a time when the fastest-growing industries don't require workers with a college education.

But it is also a potential crisis for the financial system. Some media sources, including the Washington Post, have even asked whether student loans represent the next "debt bomb" on the verge of bursting, a threat akin to the housing bubble of a few years ago.

The "student loan bubble" is not insignificant. But student loans don't pose anything like the threat to the economy that the housing bubble did. As economist Dean Baker explained:

At the peak of the housing bubble in 2006, the residential housing market in the United States was worth more than $22 trillion. It has since lost close to $8 trillion in real wealth, which is the basis of the current downturn...

[The] student loan market is now valued at $867 billion, less than 1/25th the size of the housing market at its bubble peak. Furthermore, all of it will not default, and the defaults that do occur will be spread over many years. And the government will cover most of the losses since it is guaranteed.

In addition to student loans being a fraction of the size of the mortgage bubble, banks and other private investors hold a proportionally much-smaller stake in student loans than they do in mortgage debt.

For example, in 2006, major financial institutions held nearly $5 trillion in mortgage debt, and over $6.6 trillion was in mortgage pools or trusts, collateral for the mortgage-backed securities at the center of the housing crisis. This represented over 80 percent of outstanding mortgage debt, which exceeded U.S.'s gross domestic product--the value of all goods and services produced in the country in a year. When a chunk of this massive amount of debt went bad, it threatened to bring down the world financial system.

By comparison, the market for securities backed by student loans is less than $250 billion, a significant sum, but a small fraction of the trillions in mortgage-backed securities.

So student loans don't pose the systemic threat to the financial system that the mortgage bubble did. But that fact certainly doesn't ease the human suffering caused by the student debt burden, which is akin to a modern-day form of indentured servitude.

Young people are going into debt at 6.8 percent interest--the current rate for federal student loans--just to receive an education that is now a basic requirement for the vast majority of jobs with decent pay and benefits. But when the banks were in trouble, they each got to borrow tens of billions from the Federal Reserve at effective interest of 0 percent, or close to it--and many made a profit by lending it right back to the U.S. government to finance the deficit.

It would not be hard at all to make higher education completely free in the USA. It accounts for not quite 2 percent of GDP. The personal share, about 1 percent of GDP, is a third of the income of the richest 10,000 households in the U.S., or three months of Pentagon spending. It's less than four months of what we waste on administrative costs by not having a single-payer health care finance system."

The money is there; what is lacking is the political will, and that will only change if people fight back.

The rise of the Occupy struggle last fall showed the potential of movements built from the ground up to capture the imagination of millions of people who want change. Grassroots action alone represents the only hope for those enduring the heavy burden of student debt. We need to put this crucial issue at the heart of building a new student movement.